Mesoblast rides high

Thrill seekers looking for stocks with blue-sky valuations might find a 16 per cent pull back in
Mesoblast
’s share price since it hit a 2 ½ year high of $2.19 in January as an enticing entry point.

The budding biotech has been described by some specialist fund managers as the potential “holy grail" of the bio-science sector as Mesoblast is developing stem cell technology to regenerate bone and cartilage.

The biotech is still many years away from commercialising its technology and trying to put a valuation to the speculative stock is nothing short of a challenge. But at least one broker is suggesting Mesoblast could be worth north of $10 a share just on its US market opportunity alone.

In a scenario analysis, Royal Bank of Scotland assumes that Mesoblast will capture 5 per cent of the US market for each of its potential treatments at a 20 per cent net profit margin. The broker estimates this would yield a net present value of $10.41 a share, which implies a close to 500 per cent upside to the current share price.

RBS’s confidence in a very robust outcome has been lifted by a number of positive results from recent clinical trials that are expanding the market opportunities for Mesoblast’s technology, such as the company’s mesenchymal precursor cells (MPCs) that could be used to treat diabetes.

The broker rates the chance of success at 20 per cent and is encouraging risk-tolerant investors to buy the stock. RBS has a 12-month target price at $2.08 a share.

Breville Group (BRG)

Over in the discretionary spending space,
Breville Group
is proving it doesn’t need a takeover bid to stand on its own after winning praise for its strong first-half earnings result that was released on Friday.

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The household appliances distributor posted a 37.1 per cent surge in underlying net profit for the six months ended December 31, 2009 over the same time last year to $19.7 million and a 26.8 per cent increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $32.5 million, although sales dipped 3.8 per cent to $236.9 million.

A consensus of brokers polled on Bloomberg had forecast a net profit and EBITDA of $17.2 million and $29.8 million, respectively, while sales were tipped to come in higher at $258 million.

Revenues had been negatively affected by weakness in its New Zealand and global distribution businesses even as it managed to increase sales in North America by 27.5 per cent in Australian dollar terms and excluding its exit from its non-electrical homewares business in the US.

In fact, Goldman Sachs JBWere d has upgraded the stock to a “buy" from “hold" as Breville’s growing international business could significantly lift earnings per share as the distributor recovers from bottom-of-cycle trading conditions.

Management is targeting a full-year EBITDA of $46 million to $49 million, which implies earnings growth of between 29 per cent and 38 per cent over the previous year. This puts the stock on an undemanding forward price-earnings multiple of 8.5 times.

While the stock jumped 9.8 per cent on the earnings news last Friday to $1.68 it is still down about 17 per cent since early December when the Australian competition watchdog said it would oppose the proposed takeover of Breville by GUD Holdings. GUD had subsequently allowed its offer to lapse.

Q Limited (QXQ)

Meanwhile, investors who were banking on the belief that digital advertising would be one of the first sectors to benefit from the economic upturn would not find evidence of this in
Q Limited
’s disappointing half-year result and outlook.

The digital advertising minnow swung dramatically to a loss of $20.7 million for the six months to end 2009 compared to a profit of $178,000 in the previous corresponding period as the company was forced to make significant write-downs of over-priced acquisitions it made during the last bull market.

But even discounting the write-downs, its underlying earnings were also abysmal as Q’s EBITDA line was a negative $255,000 compared to a profit of $549,000 in the first half of 2008-09.

“[The result] was not what I would have liked," Q’s chief executive, Paul Choiselat, said.

“But what I am really pleased about is the progress we are making with the performance network [TPN]. At this stage we are able to sell as many [ads] as we are able to get from websites. We are starting from a small base but we are getting good solid increases [in sales] through the last five or six months."

TPN is a move away from the more traditional advertising model where clients pay for advertising based on viewership on a website.

Q allows advertisers to now only pay when a certain action is performed, such as a viewer applying for a credit card or making a purchase.

“Rather than sell an ad for a cent or half a cent, we end up selling ads for $1 or $2. Obviously we don’t get paid for nearly as many ads but outcomes in the longer term will be far better," he said.

Q is expecting sales for the six months ending June 30 to come in around $15 million, or a 12 per cent increase over the same period last year, and EBITDA of $700,000 to $800,000.

The company also pointed out that PricewaterhouseCoopers is forecasting online advertising growth in Australia at 13 per cent for 2010, 12 per cent in 2011 and 10.2 per cent in 2012.

Mr Choiselat thinks it wouldn’t take much for Q to exceed the industry average growth rates due to its operating leverage and the fact that most of its earnings are coming off a very low base.